When the Patent Troll Comes Calling

Pretend you’re one of the Western New York credit unions unlucky enough to be sued in federal court last Friday by a company accusing them of violating its patents for ATM technology and seeking treble damages. After cursing the legal profession and lamenting the fact that the sharp decrease in law school applicants hasn’t come fast enough to spare your credit union, what should you do?

First, you should get some background. The company in question, Automated Transactions, LLC, is seeking to protect and profit from a series of patents it obtained in the mid-90s related to the use of the Internet to access services through an ATM. For instance, patent number 247, which the credit unions are accused of violating, enables users to access “an automated retail terminal in which a plurality of cards and/or services are provided in an integrated system . . . For example in a combination ATM and Internet kiosk the same credit card and/or smartcard reader is used for both the ATM and the Internet kiosk functions.”

Since you may very well have an ATM that provides those functions, should you immediately begin settlement negotiations? Not by a longshot. First, the company involved has had a tough time enforcing its patent claims in court. Last April, a claim brought against 7-11 and its ATM supplier was dismissed by a federal appeals court (In re Transactions Holding Limited, LLC, 484 Fed Appx 469 (2012)). The ruling affirmed a decision by the Patent Office to narrow the scope of the company’s patent. The court agreed with the administrators’ finding that aspects of the patent were too obvious to be worthy of legal protection. In addition, the court pointed out that the patent only applied to those ATMs directly connected to the Internet.

Now, I am not a patent attorney and it is not the type of thing you can pick up on the fly, but it appears that you have at least some grounds to contest the claim. So the next step you should take is to dust off your vendor agreements with the company or companies that provided you with your ATM technology. You are looking for any language in the contract in which your vendor agrees to indemnify you against claims brought by third parties related to the unauthorized use of this technology. If an indemnification clause isn’t in your contract, make sure one is going forward and still contact your attorney. Under New York’s Uniform Commercial Code “unless otherwise agreed,” a merchant providing software stipulates that the technology is free of any rightful third-party claims. In other words, if the patent claim ultimately has merit, the vendor should be on the hook for the at least some of the resulting damages. These third-party claims are very common.

I understand the temptation to simply settle and move on; however, that might not be the best approach. Patent litigation is going to become more, not less, prevalent as everything from online banking to mobile apps could be subject to competing claims of ownership and patent violations. It simply won’t be cost-effective to sign a licensing agreement to pay for technology every time your credit union is threatened with a lawsuit.

Good morning Henry, first off I’m a big fan of your blog, read it everyday. We did get the complaint from Automated Transactions and I did everything you suggest. Our contracts, there are several, all have indemnity clauses so we are handing it off to these vendors. Our attorney just started the process yesterday and we expect to prevail. Everyone should have thier insurance policy reviewed by CUNA Mutual or whomever to see if they have any protection to help cover expenses.